Deutsche Bank shares soar on bond-buying rumours

Shares in Deutsche Bank rocketed up more than 16 percent on the Frankfurt stock exchange on Wednesday, swept up by speculation Germany's biggest lender may launch a bond buyback to assuage concerns about its financial strength. Deutsche Bank shares -- which fell heavily earlier this week in line with the wider sector -- shot up 16.6 percent to an intraday high of 15.43 euros on Wednesday, their steepest gain in more than four years. They ended the day with a gain of 10.2 percent at 14.58 euros. The rally was driven by media reports that it might be considering a bond buyback to persuade investors that its finances are in good health. Contacted by AFP, Deutsche Bank declined to comment on the information. According to the Financial Times and Bloomberg Business News, both quoting unnamed sources, the repurchase programme would focus on so-called senior bonds or debt that is secured by collateral and is repaid first if a company goes out of business. The FT said Deutsche Bank had about 50 billion euros ($56 billion) of such bonds in issue. But no firm decision had been taken as yet, both Bloomberg and FT reported. There are a number of reasons why investors view the prospect of such a bond buyback positively. It would provide a show of strength and make clear the bank has plenty of funds available. It would also signal that Deutsche Bank believes the true value of the bonds is higher than where they are currently trading. And the group would book a gain on the buyback, helping boost income and its capital position. Like others in the sector, Deutsche Bank's shares have taken a severe drubbing recently. The Stoxx index of European banks shares fell by 20 percent in the last month in view of general signs of weakness in the eurozone economy and the challenges facing banks from ultralow interest rates and regulatory pressures. - 'Rock-solid' finances - But Deutsche Bank has taken an even bigger battering because investors are worried about its to ability to repay its debt. In a bid to allay such concerns, Deutsche Bank's new chief executive John Cryan took the unusual step this week of issuing a public statement and writing to the group's employees. "Volatility in the fourth quarter impacted the earnings of most major banks, especially those in Europe," Cryan argued. But Deutsche Bank "remains absolutely rock-solid, given our strong capital and risk position," he insisted. One of the main headaches facing Deutsche Bank is a quagmire of as many as 6,000 different litigation cases, the provisions for which helped push it to a record loss of 6.8 billion euros last year. But Cryan insisted that the bank's legal provisions would be sufficient. Analysts believe that the fears concerning both Deutsche Bank and the wider banking sector are exaggerated. "Even if the current environment is anything but ideal for banks, we see no reason for a re-emergence of a new financial crisis," said NordLB analyst Michael Seufert. "Banks have significantly beefed up their capital buffers and diversified their balance sheet risks," he said. DZ Bank analyst Christian Koch agreed. Deutsche Bank's "liquidity reserves totalled 220 billion euros at the end of September. Its core capital ratio stood at 11.1 percent," he said. The completion of its stake in China's Hua Xia Bank would strengthen the core capital ratio still further. "The magnitude of the current uncertainty and drop in the share price is exaggerated," Koch said, saying that DZ Bank currently had a "buy" recommendation on the stock.